First Asset Investment Management Inc. and First Asset Morningstar US Consumer Defensive Index Fund
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Approval of investment fund merger – approval required because merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 – the fundamental investment objective of the terminating fund and continuing fund are not substantially similar – unitholders of the terminating fund provided with timely and adequate disclosure regarding the merger.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 19.1.
July 23, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
FIRST ASSET INVESTMENT MANAGEMENT INC.
FIRST ASSET MORNINGSTAR US CONSUMER DEFENSIVE INDEX FUND
(the Terminating Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed merger (the Merger) of the Terminating Fund into First Asset MSCI USA Low Risk Weighted ETF (the Continuing Fund and, together with the Terminating Fund, the Funds) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Merger Approval).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application; and
2. the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
The Manager and the Funds
1. The Filer is registered as a portfolio manager in Ontario and as an investment fund manager under the securities legislation of each of Ontario, Quebec and Newfoundland and Labrador. The Filer’s head office is located in Ontario.
2. The Filer is the manager of each Fund.
3. Each Fund was established pursuant to a declaration of trust under the laws of Ontario.
4. The Terminating Fund is a non-redeemable investment fund whose units are listed on the Toronto Stock Exchange (TSX).
5. The Continuing Fund is an exchange-traded mutual fund (ETF) whose units are listed on the TSX.
6. The Filer and each Fund is not in default of securities legislation in any Jurisdiction.
7. Each Fund is a reporting issuer (or the equivalent) under the securities legislation of each Jurisdiction and is subject to the requirements of NI 81-102.
8. Each of the Funds follows the standard investment restrictions and practices established under the Legislation, except to the extent that the Fund has received an exemption to deviate therefrom.
9. The net asset value (NAV) of each Fund is calculated on each day that the TSX is open for business in accordance with the Funds’ valuation policy and as described in each Fund’s prospectus.
Reason for Merger Approval
10. Regulatory approval of the Merger is required because the Merger does not satisfy all the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular, a reasonable person may not consider the Terminating Fund to have substantially similar fundamental investment objectives as the Continuing Fund.
11. The investment objectives of the Terminating Fund and the Continuing Fund are as follows:
To provide Unitholders with (i) the opportunity for capital appreciation; and (ii) monthly cash distributions. The Fund invests in a portfolio that is designed to replicate, to the extent possible, the performance of the Morningstar® Consumer Defensive Index™, net of expenses.
The First Asset MSCI USA Low Risk Weighted ETF has been designed to replicate, to the extent possible, the performance of the MSCI USA Risk Weighted Top 150 Index Hedged to CAD, net of expenses.
12. Other than the criterion described in paragraph 10, the Merger complies with all the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
The Proposed Merger
13. The Filer intends to merge the Terminating Fund into the Continuing Fund.
14. The Merger was announced in a press release dated June 6, 2018 and a material change report dated June 7, 2018, both of which have been filed on SEDAR.
15. As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Filer presented the terms of the Merger to the independent review committee of the Funds (the IRC) for its review. The IRC determined that the Merger, if implemented, will achieve a fair and reasonable result for each of the Funds.
16. The Filer convened a special meeting (the Meeting) of the unitholders of the Terminating Fund on July 19, 2018 in order to seek the approval of the unitholders to complete the Merger, as required by paragraph 5.1(1)(f) of NI 81-102. As the quorum requirements at the Meeting were not met, the Meeting was adjourned to July 30, 2018 (the Adjourned Meeting). At the Adjourned Meeting, the unitholders then present in person or represented by proxy shall constitute quorum.
17. The Filer has concluded that the Merger is not a material change to the Continuing Fund, and, accordingly, there is no intention to convene a meeting of unitholders of the Continuing Fund to approve the Merger pursuant to paragraph 5.1(1)(g) of NI 81-102.
18. By way of order dated November 4, 2016, the Filer was granted relief (the Notice-and-Access Relief) from the requirement set out in paragraph 12.2(2)(a) of National Instrument 81-106 Investment Fund Continuous Disclosure to send a printed management information circular to unitholders while proxies are being solicited, and, subject to certain conditions, instead allows a notice-and-access document (as described in the Notice-and-Access Relief) to be sent to such unitholders. In accordance with the Filer’s standard of care owed to the Funds pursuant to securities legislation, the Manager will only use the notice-and-access procedure for a particular meeting where it has concluded it is appropriate and consistent with the purposes of notice-and-access (as described in Companion Policy 54-101CP Communication with Beneficial Owners of Securities of a Reporting Issuer) to do so, also taking into account the purpose of the meeting and whether the Funds would obtain a better participation rate by sending the management information circular with the other proxy-related materials.
19. Pursuant to requirements of the Notice-and-Access Relief, a notice-and-access document and applicable proxies in connection with the Meeting and any adjournment thereof, along with the ETF summary document of the Continuing Fund was mailed to unitholders of the Terminating Fund on June 15, 2018, and was filed via SEDAR immediately prior to such mailing. The management information circular (the Circular), which the notice-and-access document provided a link to, was also filed via SEDAR at the same time.
20. If all required approvals for the Merger are obtained, it is intended that the Merger will occur after the close of business on a day in early September 2018 (the Effective Date). The Filer therefore anticipates that each unitholder of the Terminating Fund will become a unitholder of the Continuing Fund after the close of business on the Effective Date. The Terminating Fund will be wound-up within 30 days following the Merger.
21. The tax implications of the Merger as well as the differences between the investment objectives, fee structure and other features of the Terminating Fund and the Continuing Fund will be described in the Circular, so that unitholders may make an informed decision before voting on whether to approve the Merger. The Circular will also describe the various ways in which unitholders can obtain a copy of the prospectus of the Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.
22. Unitholders of the Terminating Fund will continue to have the right to trade their units of the Terminating Fund on the TSX at any time until the units are delisted, which will occur shortly prior to the Merger being implemented. If unitholders of the Terminating Fund approve the Merger at the Adjourned Meeting, unitholders of the Terminating Fund who do not wish to participate in the Merger will have the opportunity to redeem their units of the Terminating Fund at a price equal to the NAV of the units prior to the Effective Date.
23. The costs of effecting the Merger (consisting of primarily legal and regulatory fees, and proxy solicitation, printing and mailing costs) will be borne by the Filer.
24. No sales charges will be payable by unitholders of the Funds in connection with the Merger.
25. The investment portfolio and other assets of the Terminating Fund to be acquired by the Continuing Fund in order to effect the Merger are currently, or will be on or prior to the Effective Date, acceptable to the portfolio manager of the Continuing Fund and are, or will be, consistent with the investment objectives of the Continuing Fund.
26. The specific steps to implement the Merger are expected to be as follows:
(a) as soon as reasonably practicable, prior to the Effective Date, the Terminating Fund will liquidate a portion of its portfolio into cash;
(b) prior to the Merger, each of the Terminating Fund and the Continuing Fund will distribute any net income and net realized capital gains for its current taxation year to the extent necessary to eliminate its liability for non-refundable income tax;
(c) the exchange ratio at which the Merger will be effected (the Exchange Ratio) will be calculated by dividing the NAV of the units of the Terminating Fund by the NAV of the units of the Continuing Fund, each as determined at the close of business on the business day prior to the Effective Date;
(d) prior to the effective time of the Merger, the Terminating Fund will transfer all of its assets to the Continuing Fund in consideration for an amount (the Purchase Price) at the effective time of the Merger on the Effective Date;
(e) the Continuing Fund will satisfy the Purchase Price by assuming the Terminating Fund’s liabilities and by issuing to the Terminating Fund that number of units of the Continuing Fund equal to the number of units of the Terminating Fund then outstanding multiplied by the Exchange Ratio. Such issued units of the Continuing Fund will be listed on the TSX at all times while they are held by the Terminating Fund;
(f) immediately thereafter, all of the units of the Terminating Fund that are listed on the TSX will be redeemed and the redemption price for such units will be paid by delivering the applicable number of units of the Continuing Fund to unitholders of the Terminating Fund based on the number of units of the Terminating Fund then held, with each unitholder of the Terminating Fund receiving that number of units of the Continuing Fund (rounded down to the nearest whole unit) as is equal to the Exchange Ratio multiplied by the number of units of the Terminating Fund held by such unitholder prior to the completion of the Merger;
(g) the Terminating Fund and the Continuing Fund will file a joint tax election in respect of the transfer to the Continuing Fund of all of the assets of the Terminating Fund;
(h) the Terminating Fund’s units will be de-listed from the TSX; and
(i) the Terminating Fund will be terminated within 30 days following the Merger.
Benefits of the Merger
27. In the opinion of the Filer, the Merger will be beneficial to unitholders of the Funds for the following reasons:
(a) the Continuing Fund will maintain its stock exchange listing and will therefore offer intra-day market liquidity for its units, but with the added benefit of posted two-way markets by designated brokers. Accordingly, units can be expected to trade at a market price approximately equal to their NAV;
(b) both the Terminating Fund and the Continuing Fund seek to provide investors with up-market participation along with significant downside protection. While the index tracked by the Fund targets the consumer defensive sector, the index tracked by the Continuing Fund targets the least volatile companies in the United States and removes the dependence on a single sector. Accordingly, the Merger will provide unitholders of the Terminating Fund with the benefit of diversification;
(c) unlike the Terminating Fund, the Continuing Fund does not pay a service fee. Accordingly, the annual management fee payable by the Continuing Fund is lower at 0.60% of the NAV of the Continuing Fund, compared to 1.00% payable by the Terminating Fund;
(d) the Terminating Fund is currently responsible for all ordinary expenses incurred in connection with its operation and administration, whereas in connection with the Continuing Fund’s operation and administration, the Filer is responsible for substantial ordinary expenses incurred; and
(e) the Continuing Fund is a substantially larger fund and, due to the continuous offering of the Continuing Fund’s units, its asset base is expected to increase, thereby increasing economies of scale and the ability to reduce its management expense ratio and trading expense ratio.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Merger Approval is granted, provided that the Filer obtains the prior approval of the unitholders of the Terminating Fund for the Merger at the Adjourned Meeting, or any further adjournments thereof.
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission